KDP ASSET MANAGEMENT, INC.

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1 ASSET MANAGEMENT, INC. High Yield Bond and Senior Secured Bank Loan Outlook June 2017 Asset Management, Inc. 24 Elm Street Montpelier, Vermont

2 The Case for High Yield Bonds Fundamentals: HY Leverage Tapers From Recent Highs Technicals: HY YTD Flows Remain Negative in Net Leverage (Net Debt/LTM EBITDA, x) HY Leverage Ratio Adjusted Leverage Source: Deutsche Bank, HY Credit Chartbook, 6/1/2017 Source: J.P.Morgan High-Yield Market Monitor, 6/1/2017 Macro: BB/B Credits Offer Best Risk/Reward Valuation: Given Current Market Environment, High Yield Spreads Are at Fair Value Source: Goldman Sachs, The Credit Trader, 6/2/ Source: Credit Suisse, CS Credit Strategy Daily Comment, 6/2/2017

3 High Yield Observations Fundamentals Defaults continue to decline and are projected to remain below historical average levels. Low levels of near-term maturities. Earnings for HY companies have been improving. HY credit metrics are improving. analysts continue to see supportive credit metrics. Technicals HY continued to grind higher in May. CCCs led the rally and outperformed higher quality for first time since February. New issuance in May increased from just $18.0 in April to $32.3B in May primarily due to an increase in refinancing activity. Mutual fund flows were negative in May, and remain negative for the year (-$5.5B). Low sovereign yields and an expectation for continued monetary accommodation should continue fostering a strong foreign bid for spread products. Valuations Market performance more dependent on interest rate risk rather than credit risk. Higher-quality carry has fallen to post-crisis lows amid global central bank accommodation and broadly supportive macro environment. Energy-focused credits have underperformed recently and now offer an increasing yield advantage over the broader HY market. CCC performance will largely depend on equity market sentiment and oil price volatility. HY spreads remain near a post-crisis low but have room to tighten further. Macro Expected modest rise in interest rates should be absorbed by additional spread compression in High Yield. External macro shocks and idiosyncratic headline events remain the greatest risks for lower quality credits.. 3

4 The Case for Senior Secured Bank Loans Fundamentals: Loan Defaults Forecast to Remain Below Long-Term Averages Technicals: Positive Loan Inflows Have Moderated on Benign Interest Rate Expectations Source: J.P.Morgan Leveraged Loan Market Monitor, 6/1/2017 Source: BofA Merrill Lynch, High Yield Flow Report 6/1/2017 Macro: Loans Continue to Trade Cheap to Ratings- Adjusted High Yield Bonds Valuation: Loan Yields Well Off Historical Lows and Have Further Room to Rally Source: Credit Suisse, CS Credit strategy Daily Comment, 6/6/2017 Source: J.P. Morgan, High-Yield and Leveraged Loan Morning Intelligence, 5/31/2017 4

5 Senior Secured Bank Loan Observations Fundamentals The loan default rate (including distressed exchanges) ticked up 8bp to 1.47% in May, the same level as the start of the year. The low level of defaults reflects solid fundamentals and decline of defaults in the energy sectors. No near-term maturity concerns reflecting record level of refinancing/repricings. New issue leverage beginning to decline as regulatory pressures increase. Interest coverage levels continue to decline but remain at elevated levels. Technicals Loan prices rose modestly in May with the median price increasing to $ B rated loans outperformed in May for the third consecutive month. May gross loan issuance fell $15B to $72B, and net new supply declined from $21B in April to only $15B in May as paydowns/repricings totaled $57B. Although loan fund flows were positive for the eleventh consecutive month, the level of retail inflows continued to moderate on reduced interest rate expectations. Net new supply in CLOs basically unchanged at $10B in May, continuing to benefit from tighter liability spreads. Valuations Percent of loans above par in May was little changed at 68.5%. Adjusted 3-year loan spreads in April tightened 5bp to 424bp to post-crisis lows. Despite tight spreads, yields well-off 2014 lows with potential to rally further, reflecting rising LIBOR and 3-year swap rates. Overall loan volatility has been relatively subdued compared to HY bonds as loans are: higher in cap structure, have higher recovery levels, and are floating with LIBOR rates above 100bp and rising. Higher quality loans continue to trade wide of high yield. Macro Floating-rate bank loans for defensively postured investors are compelling given the attractive risk/reward adjusted returns, and portfolio diversification benefits. Leveraged loans expected to have one of the best risk-adjusted returns in Floating-rate nature of bank loans provides a natural hedge to increasing interest rates and lowers duration risk. Negative correlation to Treasuries and low correlation to other asset classes. 5

6 This is an analytical piece and the asset classes discussed herein, and any other materials provided to you, are intended only for discussion purposes and are not intended as an offer or solicitation of an offer with respect to the purchase or sale of any security and should not be relied upon by you in evaluating the merits of investing in any securities. These materials are not intended for distribution to, or use by, any person or entity in any jurisdiction or country where such distribution or use is contrary to local law or regulation. Past performance is not indicative of future results. The asset classes discussed herein should not be perceived as investment recommendations. It should not be assumed that investments in any asset class discussed was or will prove profitable. The views expressed herein represent the opinions of Asset Management, Inc. and its affiliates and are not intended as a forecast or guarantee of future results. This material may not be reproduced or used in any form or medium without express written permission. Additional information on, including fee schedules can be found in Form ADV Part II which is available upon request. 6